News & views

Blog /

18 February 2009/

Brand valuation: all smoke and mirrors?

by Ben Knapp at 7:00 am 18 February 2009
Filed under: Art, Branding, Luxury, Press

'Black swans are always emerging from everywhere.'

‘It’s a sobering time for number crunchers. From quantitative risk analysis to credit ratings, many financial statistics have revealed more artistic license than resemblance to reality,’ says an editorial in the Financial Times of 30 January 2009. And you can add brand valuation to that list, too. All this number crunching whether it’s risk analysis, GDP projections or brand valuation is part of an attempt to measure areas of activity which are for the most part inherently unquantifiable. The assumption is that people and the organisations they manage, act only out of rational calculation; it’s a natural extension of the economic theories of the Chicago School. These figures are a major part of denial of risk.

At another level they are like a comfort blanket for a child, which makes it feel safe, secure and stable. But all of us know deep down that life isn’t like that. Brand valuation and the other statistical analyses with which it is associated are supposed to be an aid to predicting the future, when as has recently been made clear yet again, the future stubbornly refuses to be predicted. All you can really predict about the future is you don’t know what will happen. Black swans are always emerging from everywhere.

So what does this say about an apparently rational process through which, utilising a series of complex, arcane, and, to a lay mind, more or less incomprehensible statistical measurements, brands of all kinds are given a financial value? Well, in my judgment these figures that are produced and so thoroughly scrutinised are about as meaningful as sticking your wet finger in the wind and shouting out a number.

The truth is that brands jump around all the time. They are in fashion, then they go out of fashion. They are well managed, then they are badly managed. Brand managers become too risk averse or they take too many risks. The list of what can happen to brands is endless. Just look at the performance of some famous, apparently invulnerable financial brands over the last few months.

I don’t know if anyone was asked to value RBS corporate brand in say 2007, but I can tell you what the stock market said then and what it says now. In June 2007, RBS shares were valued at £6.30. Today in February 2009 they are valued at just 20p. What goes for RBS goes for much of the rest of the financial sector. I didn’t notice Lloyds Banking Group (as it has rebranded itself) talking about the value of Halifax and Bank of Scotland brands as it took over the collapsing HBOS Group. I’m not implying that Halifax and Bank of Scotland have no brand value; on the contrary, they are massive brand assets. All I am saying is that nobody can calculate their current financial value as brands because they are badly damaged.

And it doesn’t only happen in the financial sector. Scandal destroyed WorldCom and Enron, which in turn brought down the Andersen brand, the greatest name in audit and accounting. Accenture, its former sister, was only saved from disaster because it had changed its name from Andersen Consulting a few years before in response to a legal ruling requiring it to do so.

The brand valuation process ignores tempest, turbulence and volatility. It is deliberately designed to create an entirely illusory impression of permanence and stability. So why is this profoundly misleading activity rapidly growing as a service offering of branding consultancies and accountancy companies?

Tangible assets like buildings and plant machinery have always had a place on the balance sheet. Traditionally intangible assets haven’t, although in recent years this has been changing. Intangible assets like intellectual property, in the form of patents, brands and so on, are becoming increasingly valuable.

Over the years, many sensible companies have paid a great deal of money for brands. So it isn’t surprising that accountants and some branding consultancies and other specialists have created complex econometric formulae both to value brands in the short and medium term and to justify a significant place for them in the corporate balance sheet. The idea behind all this is that they fit into the corporate financial accounts in a way that is logical, rational and above all susceptible to numerical analysis. All this is entirely understandable and I am most sympathetic to companies attempting this task, particularly if they happen to be a Coca-Cola or a Virgin, when it is clear the brand is by far their most significant asset. So although brand valuation is pretty much worthless as a technical tool, it does have the apparent advantage that it makes companies with brands feel good and improves the appearance of their balance sheet.

The truth of the matter though is that brands have no objective, absolute value. Whether it’s a T-shirt or a huge financial institution, there’s only one way to establish the value of a brand and that is to see what people will pay for it. All the rest is, as the Financial Times put it, artistic licence, or – putting it a shade more honestly – smoke and mirrors.